LR Demand Difficulties

There has always been a compelling story being told about how larger product carriers are the future, in particular the LR2s, says Gibsons Weekly Tanker Report.

However, the sector has had a particularly challenging few months, with little optimism regarding a sustained recovery in earnings.

The LR2 story centered around the expansion of refining capacity in the Middle East, capacity reductions in Europe and wider product imbalances driving long haul trade. In some regards that story delivered.

Despite these issues, the main driver behind the LR2 story (Middle East export growth) largely deliveried, supporting a period of strong LR2 earnings. However, the growth was always going to be finite as exports plateaued into 2016, whilst fleet growth started to excelerate.

Clearly the initial fleet expansion was manageable. However, as is often the case, it was the extent of previous ordering activity which is being felt today. Demand growth may have taken a hit from the factors described above, but was always expected to ease relative to the past few years.

On the immediate horizon with limited new capacity coming online, coupled with the headwinds currently facing the global products markets, a speedy recovery may not be on the cards.

So where will the next surge in demand come from? We’ve written at length in the past about how stocks need to come down to allow for a return to normal trading conditions. However, beyond these factors some supportive developments are starting to appear just over the horizon.

Collectively Saudi Arabia, Kuwait, Oman, Iran, Iraq and the UAE plan to add over 1.5 million b/d of capacity between 2018-2021 which, will start to support export growth from the region once again.

Furthermore, this will coincide with a major change in the global bunker specification and shift towards middle distillates. With more export oriented demand coming online and a tighter middle distillates market, larger product carriers could once again be in high demand to move large volumes of compliant gasoil long distances.

Furthermore, if ordering activity stays within reasonable limits, and scrapping begins to accelerate driven by regulatory developments, the foundations for a more sustainable market recovery could soon be laid.